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ENTERPRISE RISK MANAGEMENT. June 2008. ERM AT TD. TD as a regulated financial institution is a strong advocate and practitioner of ERM. Regulators, such as OSFI (Canada), FSA (UK), SEC (USA) demand financial institutions employ advanced risk management practices.

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erm at td
ERM AT TD
  • TD as a regulated financial institution is a strong advocate and practitioner of ERM.
  • Regulators, such as OSFI (Canada), FSA (UK), SEC (USA) demand financial institutions employ advanced risk management practices.
  • TD manages all its key risks through ERM framework
  • Risks identified, ownership is determined and centralized risk management (oversight) is established.
  • Key risks include strategic, credit, market, operational, insurance, regulatory/legal, reputational and liquidity.
who is responsible for risk at td
Who is responsible for risk at TD ?

Board of Directors

  • Provides oversight

Risk Committee of Board

  • Approves enterprise risk policies, monitors management, performs strategic analysis of trends

Senior Executive Team

  • Identifies key risk, monitors, evaluates and responsible for managing across the Bank
  • Executive Committees (e.g. Repuational, A/L, Operational)
  • Audit (independent assurance)
  • Compliance (independent review)
  • Risk Management (enterprise level policies and standards) Monitors and reports
  • Business Units (owns and manages risk). Sets and implements policies for business consistent with enterprise-level polices)
key aspects of td s erm
Key Aspects of TD’s ERM
  • Ownership of risk by business units
  • Centralized oversight
  • Strong risk culture (Starts with the Board/ CEO, with risk having a meaningful role in all decisions which have significant risk impact)
  • Empowered, credible risk group/respected by the business units.
  • Policy framework ( at least one policy and sometimes many for each major risk)
  • Transparency of risk discussions
  • Strong analytic approach. Quantification where feasible/desirable
  • Rigorous approval process for exceptions and overages
  • Multi-level review (e.g. audit monitors risk management processes)
td s energy trading business applicable policies
TD’s Energy Trading Business-Applicable Policies
  • New business policies (do we have the proper systems, regulatory approval, legal, accounting etc to support a new business/product.)
  • Reputational risk (risk of negative publicity will cause a decline in TD’s value, liquidity or customer base)
  • Credit policies. Limits for the business and for its counterparties.
  • Market risk policies (establish market risk tolerance)
  • Valuation policies (models, reserves, independent price validation)
  • Business recovery policies (failure of systems, pandemics, etc)
  • SOX policies
  • Security (security of systems, confidential information)
  • Know your customer and anti-money laundering
  • Personal trading policies
td energy market risk policies
TD Energy-Market Risk Policies
  • Establishes market risk tolerance for the business
  • Approved products (e.g. robust option models, calibration to market prices, sufficient trader knowledge, independent pricing, verifiable parameters)
  • Approved locations (liquidity, independent pricing, trader knowledge)
  • Term to maturity limits
  • Greek limits (Delta, Vega) and notional limits (aggregate and by location/time bucket)
  • VaR limits (commodity, interest rate, fx, aggregate)
  • Stop loss limits (one day, five day) for energy. Aggregate limits for Bank
  • Stress limit for energy. Measures impact of severe but plausible shocks to market parameters.
td energy risk management process
TD Energy Risk Management Process
  • Extensive daily reporting of market risk (p&l attribution by book, commodity price changes, volatility surfaces, delta, strike maps, gamma ladders, VaR, stress, risk limits, backtest etc.) and credit risk (exposure/availability by counterparty)
  • Daily review of business/investigation by Risk Management (profitability, market conditions, positions, price volatility, liquidity, etc.) and discussions with Front Office as warranted.
  • Overage reporting-escalation based on level of overage
  • Independent price validation
  • Market Risk Committee meets bi-weekly to discuss risk issues and policies
  • Market risk policies updated regularly to reflect new products/locations/market conditions.
  • Continuous improvement of systems and processes
why does erm fail
Why does ERM fail?
  • While most financial institutions and many hedge funds and corporates have implemented ERM, we continue to experience periodic massive risk failures (sub-prime, asset based commercial paper, SocGen, Amaranth, etc.)
  • Most ERM programs appear to be very similar (at least as to form) , but outcomes are dramatically different.
  • Why?
reasons for erm failure
Reasons for ERM Failure
  • Form over substance. Many ERM programs are implemented to satisfy external requirements (e.g. regulators, ratings agencies, auditors) and are not necessarily driven by the senior leadership team.
  • Risk management team is not credible with respect to the operating business units (risk as overhead). Lack of industry/market knowledge, inexperience, a theoretical vs. practical mindset may all contribute to diminished credibility.
  • Greed (either at the corporate or at the individual level) outweighs risk concerns.
  • Operational risk is neglected. Poor systems and sloppy processes allows the rogue trader to assume unwarranted risks.
  • Over reliance on third party risk assessments (e.g. asset backed commercial paper, sub-prime)
  • Risk falls between silos (e.g.credit default swaps-where credit/market risk mix)
  • Occasionally-poor risk metrics (valuation models, VaR models)
  • Risks change over time and new risks emerge. Risk tends to place limits on yesterday’s risks-not tomorrow’s.
reasons for success
Reasons for Success
  • ERM fully supported by senior leadership team and the overall corporate culture
  • Credible, knowledgeable and experienced risk staff who are able to effectively interface with senior line executive
  • Risk processes must be transparent and Risk must have a seat at the table when major decisions impacting the institution’s or corporation’s risk profile
  • Risk managers from all disciplines (market, credit, legal, operations ) must be able to communicate effectively with each other.
  • Risk systems must be robust and effective.
  • Don’t neglect operational risk.
  • Learn from mistakes (your own and others)